What is the external environment?
The external environment of the firm comprises all the external influences that affect its decisions and performance. These influences can vary from company to company and industry to industry and can change, sometimes very rapidly, over time.
- There are two particular aspects that make the environment for international business is changing faster than ever:
- Complexity: relates to the increasing diversity of customers, rivals, suppliers, and of socio-cultural, political, legal, and technological elements confronting the international business. It makes more difficult for firms to make sense of, and to evaluate, information on changes in the environment and to anticipate, eir impact on the business
- A turbulent: is one where there is rapid, unexpected change, in contrast to a stable environment where change is slow and predictable
- Growing complexity and turbulence in the environment makes it more difficult for firms to predict demand that leads to competition becoming more disorderly, shortens thetime available to make decisions increases the risk of product obsolescence so forces businesses to speed up the innovation process
Opportunities and Threats
Globalization, associated with the increased cross-border movement of goods, services, capital, and people. The widening and deepening of globalization mean that local environments are not solely shaped by domestic events but also coonect with regional, or national events. Increasing interconnectedness means that threats and opportunities are magnified, especially for organizations operating internationally.
Globalization generates opportunities for business to enter new markets, take advantage of differences in the costs and quality of labour and other resources, gain economies of scale, and get access to raw materials.
- How companies respond to the new environment:
- Globalizing production
- Reorganizing their supply chains to take advantage of cheap labor, cheap international transport
Globalization is also accompanied by threats which can have devastating effects on business, causing long-term damage or even leading to the collapse of the business like financial risks, currency crises, inflation; political risks, natural disasters such as earthquakes and tsunamis.
Big international firms spend time and resources regularly to:
- Scanning their environment in order to identify forces that will have a major influence on them
- Looking out for changes in the environment that could have an impact on their operations that helping or hindering them achieving their objectives
- For example:
Taking profit as an example, this is determined by the ability of the firm to generate sales revenue and control costs by identifying external forces that generate major opportunities to increase revenue or to cut costs, at the same time the company will try to detect threats that reduce revenue.
The political and legal environment is made up of the various political and legal systems under which business operates.
- Governments and parliaments, pass laws and establish regulations that shape the legal environment within which business operates
- The courts, the police, and prisons ensure that the laws are enforced and lawbreakers are punished
Industries like oil, need to pay particular attention to political environment because it very politically sensitive sector, it relates to energy. Politicians need to consider carefully to know companies are given the opportunity to search for, and exploit oil reserves
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